Europe Borrows Washington's Rulebook, and Its Risks

For the better part of a decade, European regulators told a simple story about themselves. They were the grown ups of global finance, the ones who had learned the lesson of 2008 and refused to unlearn it, whatever the temptation. Then Washington started cutting, American banks started printing money, and the story became harder to tell with a straight face.

The change of tone in Brussels has been gradual rather than dramatic, but it is unmistakable. On July 17 the European Commission published its assessment of the competitiveness of the bloc's banking sector, a document that reads less like a supervisor's memo and more like a plan to unlock a system its authors believe has been tied up in its own knots. Legislative proposals are pencilled in for the first quarter of 2027.

What the Americans did

The context is impossible to miss. In the United States, the sweeping capital overhaul known as the Basel endgame, drafted in 2023 to force big lenders to hold substantially more equity against their risks, has been formally abandoned. In its place came a set of 2026 proposals running well past a thousand pages, pointing firmly in the opposite direction. Regulators also softened the enhanced leverage requirement for the largest American banks, trimming the group level standard and capping the requirement at their deposit taking subsidiaries.

The effect on the balance sheets was immediate, and so was the effect on the mood in European boardrooms. Executives in Frankfurt, Paris and Milan watched their American rivals free up equity, buy back stock and lend into the same markets that European institutions were struggling to serve. The complaint that European rules had been gold plated well beyond the internationally agreed standard, once a lobbying talking point, started appearing in ministerial letters.

The trapped money problem

The Commission's own framing is careful. It does not describe what it is doing as deregulation, and officials bristle at the word. The argument is that Europe's banking market is not too safe but too fragmented, carved into national compartments by supervisors who insist that capital and liquidity raised in their country stay in their country, no matter which group owns the bank.

The numbers attached to that argument are striking. Officials estimate that something in the order of 225 billion euros of capital and a further 250 billion euros of liquidity sit stranded inside national ring fences, unusable by the parent groups that raised them. Freeing that money, the Commission argues, would cut funding costs, increase lending and finally make cross border expansion worth the trouble. It sets that against the roughly 1.2 trillion euros of investment the bloc says it needs every year to hit its climate, defence and technology goals.

Nobody in Brussels wants to be the official who signed the paper that made the next crisis possible, and nobody wants to be the one who watched European finance quietly shrink.

What is actually on the table

The proposals cluster around a few ideas. National discretion would be pared back, so that a parent bank has real authority over the group it owns rather than a collection of semi independent national subsidiaries. Deposit protection would be levelled across the banking union, with rules designed to stop a cross border failure landing on a single national budget. Capital requirements would be tailored more explicitly to the size and complexity of the institution, easing the load on small and regional lenders that have long argued they are being supervised as if they were global investment banks.

Large multinational groups such as UniCredit, BNP Paribas and Santander sit at the centre of the redesign, since they are precisely the institutions whose capital is scattered across jurisdictions. Common anti money laundering rules are due to take effect in July 2027, and the Commission has signalled a further look at the consumer protection requirements that differ from country to country and make a genuinely European retail bank close to impossible to build.

The line nobody can quite draw

The phrase officials keep reaching for is simplification without deregulation, which sounds reassuring until you try to locate the boundary. Analysts at Bruegel, the Brussels research institute that has spent years tracking this debate, have warned that the danger is not a deliberate decision to lower standards but a gradual slide, in which a well organised industry uses the language of streamlining to win concessions that add up to something larger.

That warning has weight because the political conditions favour the banks. Finance ministers from the Netherlands, Germany, France, Italy, Poland and Spain issued a joint call for simplification in March, an unusually broad coalition for a technical subject. Growth is weak, defence spending needs financing, and the argument that European banks are too constrained to fund any of it has found a receptive audience.

A bet on the cycle

There is a version of this in which Brussels is simply correcting an overshoot. European rules did accumulate in layers, each addition sensible on its own and burdensome in combination, and a system that cannot move capital across its own internal borders is not obviously safer for it. Fixing that is not the same as copying Washington.

There is another version, and it is the one the sceptics keep pointing at. Capital rules are always easiest to loosen when the sun is out and losses feel theoretical. The last time the transatlantic conversation was about competitiveness rather than resilience, the result was not a durable European advantage. It was a decade spent rebuilding. Whether this round ends differently depends on whether the safeguards the Commission promises survive the long march from a July report to a law, and on whether anyone is still paying attention when they do.